In On-Demand World, Networks Need Windows

The TV networks, especially the free-to-air broadcast networks, have always had trouble getting their heads around selling their shows directly to consumers.

Long accustomed to viewing advertisers as their “customers,” they initially balked at selling TV shows on DVD, fearing it would undercut the ad-supported syndication market that had been their staple “after-market” distribution channel. They soon discovered, however, that consumers were eager for the convenience of watching re-runs on their own schedules and they were willing to pay a premium for it, more than offsetting any negative impact DVD sales had on the syndication business. Some consumers, moreover, were even willing to buy boxed-sets of series that were long-since off-network and out of syndication, creating a new, long-tail revenue stream.

When iTunes came along, the networks went through the same hand-wringing, fearing that selling individual episodes shortly after initial airing would undercut network ratings and harm affiliates. As it turned out, the $1.99 price per episode ($2.99 for HD) discouraged enough consumer purchases that the threat was never realized.

Now comes iTunes again, on the eve of the iPad launch, with a new proposal to the networks to increase sales of individual episodes by dropping the price of a download from the current $1.99 to $0.99. And once again, the networks are uncertain how to respond. Here’s a hint: The issue isn’t the price, or at least not only the price. The issue is audience segmentation.

While they’ve balked at direct-to-viewer sales, the networks embraced, free, ad-supported streaming of their shows, actually launching Hulu and TV.com themselves, seeing in it a re-creation of the syndication business without the local broadcast partners.

That preference for a traditional ad-supported business model hasn’t really paid off for the networks, however. Hulu’s biggest impact on the networks’ business so far has been to undercut DVD and iTunes sales without offsetting those losses through incremental advertising revenue. Today, in fact, the networks are trying to undo the damage by moving parts of Hulu behind a paywall.

The real question confronting the broadcast networks is not whether their shows should have a “value” on iTunes of $1.99 or $0.99, but whether a large-enough segment of the audience, willing to pay to watch single episodes without commercials, can be distinguished from the broader digital audience that today watches shows for free on Hulu.

If they believe the answer to that question is “yes,” then they should cultivate that audience at whatever price is necessary to generate demand. A transactional market for single episodes — at almost any price — will generate higher margins per viewer for the networks than will ad-supported streaming market, just as DVD sales produce higher margins for the movie studios than does Netflix’s subscription rental model.

Right now, the networks are making their shows available for free through streaming platforms like Hulu while simultaneously trying to sell them through iTunes for $1.99 a piece. True, the Hulu version has ads while the iTunes version does not, but the ad load on Hulu is relatively light. In short, the products are too similar to effectively segment the audience.

One solution might be to increase the ad load on Hulu, as in fact the networks are now considering. But another solution would be to window the two business models, moving the ad-supported streaming window back until sometime after the ad-free, paid download window, just as the ad-supported broadcast window for movies comes after the transactional DVD window.

The networks, of course, don’t have a lot of experience with that kind of audience segmentation. Their business, historically, has been based on aggregating the largest audience possible on behalf of advertisers. In a world of on-demand access, however, content has a different value for different segments of the audience at different times and under different usage models.

Figuring out what those audience segments are, and how to serve each of them, is more important than the price for any one of them.

Question of the week

Will enough consumers pay for TV content, at any price, to make them worth pursuing?

It’s always a matter of what they get. iTunes pricing is decent, but the lack of portability is frustrating — for example, right now when I try and watch something I’ve gotten through iTunes, I can’t watch it with my second, non-Apple-made, monitor plugged into my laptop because it’s an unauthorized display device. Spend $20 on downloads, or pick up a copy of the TV show I want to watch on DVD — a portable cross-platform medium, that I can watch relatively easily on any TV in my house or my computer, without prior authorization! Netflix Instant Streaming has been a similar revelation — the shows I want to watch, quickly, without dealing with downloads or similar. Worth my monthly fee, without question.